DBRS Confirms Rating on Faircourt Split Trust 6.00% Preferred Securities at Pfd-3 (low) Relating to Follow-On Offering

DBRS Limited (DBRS) confirmed the rating of Pfd-3 (low) on the 6.00% Preferred Securities (the Preferred Securities) issued by Faircourt Split Trust (the Trust). The rating confirmation is being provided in relation to the execution of the overnight offering of additional Preferred Securities and Trust Units (the Trust Units) of the Trust that took place on November 3, 2017, and closed on November 17, 2017 (the November Follow-On Offering). Approximately $5 million in gross proceeds were raised during the November Follow-on Offering.

The net proceeds of the November Follow-on Offering will be invested according to the Trust’s investment objectives. The Trust’s investment portfolio (the Portfolio) is broadly diversified, comprising North American equities and income-producing securities, including, but not limited to, dividend-paying equities, income fund securities, income-producing securities and short-term investments. As of October 5, 2017, the Portfolio was composed approximately of the following assets: Consumer Discretionary/Staples (23%), Real Estate Investment Trusts (20%), Industrials (18%), Financials (12%), Cash and Short-Term Investments (9%), Materials (6%), Utilities (6%), Power and Pipeline (3%) and Information Technology (3%). The blended benchmark for the Trust comprises a 70% weight in the S&P/TSX Composite Total Return Index and a 30% weight in the S&P 500 – CDN Total Return Index.

The Portfolio generally consists of equities and securities of Canadian issuers, but up to 40% may include equities and securities of non-Canadian issuers, provided that 70% of the Portfolio remains denominated in, or hedged back to, Canadian dollars at all times. No more than 10% of the Portfolio may consist of securities of a single issuer with the exception of the Government of Canada, a Canadian province or a Canadian municipality.

The Trust may borrow up to 10% of the total assets, which will create senior indebtedness. In this case, the Preferred Securities will be subordinate to all senior indebtedness, including any indebtedness to trade creditors of the Trust. The payment of the principal of, and interest on, the Preferred Securities will be subordinated in right of payment to the prior payment in full of all senior indebtedness of the Trust. As of October 12, 2017, there was no such borrowing outstanding.

Holders of the Preferred Securities receive fixed quarterly preferred interest payments of $0.15 per security to yield 6.00% annually on the issue price of $10.00. Holders of the Trust Units (the Trust Units) receive regular monthly distributions in the amount of $0.06. These distributions, however, are subject to change at the Trust’s discretion, prevailing market conditions and the Trust’s asset coverage test. All distributions made to holders of the Trust Units are subordinate to the distributions made to holders of the Preferred Securities. The asset coverage test does not permit any cash distributions to the unitholders if, after giving effect to the proposed distribution, the total assets of the Portfolio would be less than 1.4 times the outstanding principal amount of the Preferred Securities.

The main form of credit enhancement available to the Preferred Securities is a buffer of downside protection. The downside protection corresponds with the percentage decline in the Portfolio’s market value that must be experienced before the Preferred Securities would be in a loss position. As of October 12, 2017, the downside protection available to holders of the Preferred Securities was approximately 30.7%. The Preferred Securities distributions are expected to create an average annual grind on the net asset value of approximately 7% in the next two years. The Trust actively employs writing covered calls and cash-secured put options on the common shares held in the Portfolio to supplement the yield earned on the Portfolio and to generate additional income. The Trust may also engage in securities lending.

The main constraints to the rating are the following:
(1) The downside protection available to holders of the Preferred Securities depends on the value of securities held in the Portfolio.
(2) Volatility of prices and changes in the dividend policies of the underlying issuers may result in significant reductions in interest coverage or downside protection from time to time.
(3) Reliance on the manager to generate a high yield on the investment Portfolio to meet distributions and other Trust expenses without having to liquidate Portfolio securities.

Based on these considerations and performance metrics, DBRS confirms the Pfd-3 (low) rating of the Preferred Securities issued by Faircourt Split Trust.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is Rating Canadian Split Share Companies and Trusts (July 2017), which can be found on dbrs.com under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.